Need capital to start or build your business? Ever try to figure out who the best fit VC is for you? In my view, the absolute best way for you to get the capital to build your business is to get your capital from your customers in the form of gross profits.

VC Money is Expensive

VC money is dilutive, meaning that if you take their money, you will own less of your company and you have an investor with rights that reduce your control over your business. The only way for VC money to add value to your business is if you use the money in a way that builds more value in your business than the dilutive effects of the VC money. It is true that the value of your business will be higher when you first take the money, as your business will have both its enterprise value plus the cash that is sitting on the balance sheet, but let’s face it — you will spend the cash building your business and you need to turn the cash into business value that is a lot greater than the cash in order for your VC money to add value to your business!

Customer Money Builds Value In Many Ways

More gross profits from customers is the single best way to build value in your business by investing those gross profits to create more gross profits! (by the way, the simplest way to think about gross profits is that they are the cash that you get from your customers less your out-of-pocket costs for serving those customers.)

In addition to adding value to your business and giving you more money to invest, your focus on gross profits will help you to do many things that will make your business better, including:

Working to find your best customer segment that will give you the best gross profits over time

Collecting a portfolio of customers who are customers willing to allow you to make money off of them and avoid lower value customers who only want to get things for free.

Creating higher gross margins that will give you more gross profits off of each unit of customer revenue. For example, finding where you can change your pricing model, raise prices, or lower your costs to serve customers through things like more automation, a more intuitive product and better in-product help.

In essence, customer money adds value to your business and allows you to avoid dilutive VC investments, and the search for customer money (in the form of gross profits) forces you to create the best economic model for your business while building your business!

Where Do You Want To Spend Your Time?

You can spend your time searching for your next VC round or you can spend your time gathering customer money and building your business. Clearly, VCs can play a major role in getting you the resources and skills necessary to build your business, but the best VCs are your customers!

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Rocket Builders, a Vancouver consulting firm focused on early-stage companies, once did some research that found that the number one thing that correlated with a start-up success was whether they had built their first product with customers. This turned out to be more important than IP, management, or estimates of market size.

http://www.openviewpartners.com Scott Maxwell

Interesting data and it makes a lot of sense. Thanks Steven!

http://www.mytradezone.com MyTradeZone-B2B Social Network

Great tips, this is a big issue since finding VC investors takes lots of time as well, and by working with customers, you can build a better product and directly get feedback and revenue.

http://www.menco-finco.com edward blake mendez

wise advice scott! this concept has surfaced negatively and positively with my own advisory experience. it remains cogent considering how much press private investment fundraising has garnered in the popular and trade press.

as an example, a b2b ecommerce client spent significant energy seeking investor financing and neglected his core business. the owner-operator said that he has devoted around 95% of his time to fundraising; unfortunately, the human capital behind the business could not manage without him, and his clients’ experience suffered, weakening future sales growth.

that said, one of my clients has caught onto the idea. he believes that he could tighten up his data delivery company’s business model rather than expand beyond its current carrying capacity. his brainstorming session avoided unnecessary value destruction and focused on his current core competencies.

Blake, thanks for adding your thoughts. In my experience, small companies that do financing rounds tend to have difficulties like what you are describing the quarters surrounding their financing activities. It is really difficult for a small team to build a portfolio of happy customers and work through a capital raise, and in my view all companies should think hard before going the venture capital route. It is a great fit for some, but not for everyone. Customer capital is a great fit for everyone!